Optimal Law Enforcement with Sophisticated and Naive Offenders

Research in criminology has shown that the perceived risk of apprehension often differs substantially from the true level. To account for this insight, we extend the standard economic model of law enforcement (Becker, 1968) by considering two types of offenders, sophisticates and naïves. The former are always fully informed about the enforcement effort, the latter become informed only when the effort is revealed by the authority; otherwise, naïves rely on their perceptions. We characterize the optimal enforcement effort and the decision whether to hide or reveal it. The welfare-maximizing authority chooses either a relatively high effort which is then revealed, or it chooses a relatively low effort which remains hidden. The latter policy becomes more favorable, the larger the share of naïves in the population and the higher their level of perceived effort. We then analyze three empirically important extensions, thereby allowing for lower efficacy of the enforcement effort due to avoidance activities, endogenous fines, and heterogeneity with respect to naïves’ perceptions.